Futures Contract
What Is a Futures Contract?
A futures contract is a standardized agreement to buy or sell an asset at a predetermined price on a specific date in the future. Futures contracts are commonly used for commodities, financial instruments, and market indexes.
These contracts are traded on regulated exchanges and are a key component of derivatives markets.
Why It Matters
Futures contracts allow investors and businesses to lock in prices for assets, helping them manage price volatility and financial risk. They are widely used by producers, consumers, and traders.
Futures markets also help establish price expectations for commodities and financial assets.
How Futures Contracts Work
A futures contract includes several key terms:
- the underlying asset
- contract size
- delivery date
- agreed price
Many futures contracts are settled in cash rather than through physical delivery of the asset.
Example
A farmer may use a futures contract to lock in a price for wheat that will be harvested months later, reducing the risk of falling prices.
Futures Contract vs Options
- Futures contracts obligate both parties to complete the transaction.
- Options contracts provide the right, but not the obligation, to buy or sell an asset.
FAQs About Futures Contracts
Who uses futures contracts?
Farmers, businesses, investors, and traders.
Are futures contracts risky?
Yes. Price changes can create significant gains or losses.
Do futures contracts involve physical delivery?
Some do, though many settle in cash.
Related Terms
